Localization as a means to create a cluster economy

Localization of manufacturing with a pool of local producers of parts, feedstock and equipment clustering around a foreign enterprise, is a straight-forward way to promote import substitution. Examples in Russia include Siemens locomotive production, which has gathered about 100 Russian suppliers, and plants of Volkswagen, Peugeot & Citroën, and Volvo, having altogether formed an automotive cluster in the Kaluga Region. The Russian authorities are determined to roll out this experience to other regions and industries.

The expansion of cross-industry clusters is a priority of Russia’s industrial development strategy through 2035. Those are set to become the local powerhouses and drive socio-economic development, encouraging the growth of both large producers, and small and medium-sized businesses.

As of late 2016, Russia had 127 industrial clusters in 57 regions.

Small and medium-sized businesses accounted for 58% of their participants.

Federal districts with the biggest number of industrial clusters are the Central Federal District (37), the Volga Federal District (25) and the Northwestern Federal District (19).

An efficient tool of the cluster economy is localization of manufacturing, which creates a pool of local suppliers around an enterprise with foreign equity participation.

An example is the Kaluga automotive cluster centred around Volkswagen Group Rus, Peugeot-Citroën Mitsubishi Automotive and Volvo.

Localization at Volkswagen is 40% (expected to grow to 75%).

Localization at PCMA is around 35% (expected to reach 50%).

Volvo also plans to expand localization.

The cluster hosts a total of 27 car part producers.

Another successful example is Siemens.

Localization of manufacturing of Lastochka high-speed trains at the JV of Siemens and Sinara Group in the Urals exceeds 60% and is projected to reach 80%. About 100 Russian suppliers are involved in the project. Discussions are underway to set up a rolling-stock manufacturing cluster in the Sverdlovsk Region based on this enterprise.

Localization at Siemens Transformers, Voronezh, exceeds 80%, and at Siemens Elektroprivod, St. Petersburg, it ranges from 40% to 70%. Both plants are contributing to Lastochka.

The segment has a bright outlook as some promising projects backed by federal and local governments are in the pipeline:

The Stavropol Territory Industrial Development Fund now offers low-interest loans at 5% for projects on import substitution and localization, with a focus on component manufacturing.

The automotive cluster in the Samara Region has looked into 30 projects to localise manufacturing of parts for AvtoVAZ.

In 2016, the Penza biomedical cluster made plans to set up manufacturing of medical products for X-ray endovascular surgery.

In 2017, a plant of Great Wall Motors will be commissioned in the Uzlovaya industrial park, Tula Region, with a localization level of 70%. Talks are underway with Tula companies on manufacturing components for Great Wall.

However, some challenges are still there.

As Russian suppliers fail to quickly set up quality production of complex car parts, carmakers have begun sourcing from their foreign suppliers. So, many components are delivered by global companies, which hampers the advancement of Russian technology.

Demand for cars dropped during the crisis, with a large number of parts projects put on hold and some companies shut down – both foreign (e.g. Canada’s Magna and US seats producer Johnson Controls in St. Petersburg) and domestic.

In 2018, the agreement on industrial assembly setting forth incentives for manufacturers in exchange for a certain level of localization expires. It may be extended in an updated version, with localization requirements lowered if a part of the end products are exported. This will help keep the overall output despite the decline of consumer demand in Russia.